Electronic Arts wins big game to buy PopCap

After months of speculation about the company's future, PopCap was sold to game giant Electronic Arts in a breathtaking deal worth up to $1.3 billion.

It wasn’t too long ago that the three founders of PopCap Games were struggling to get by, unable to get a credit card for the company they initially called Sexy Action Cool.

They were among thousands of software developers who came chasing the digital gold rush of the late 1990s, only to find themselves struggling after the crash in 2000, desperately trying to make a living from games they were building in a Seattle apartment.

But after figuring out a “try before you buy” system that helped sell more than 50 million copies of its breakout hit “Bejeweled,” PopCap eventually became one of the crown jewels of the games industry and Seattle’s tech community.

Tuesday, after months of speculation about the company’s future, PopCap was sold to game giant Electronic Arts in a breathtaking deal worth up to $1.3 billion.

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The deal gives EA an especially strong presence on Facebook, where the combined company will trail only San Francisco-based Zynga, and on Apple platforms, where EA and PopCap together accounted for six of the top 10 selling games last year.

“Quite frankly they are the Pixar of the space,” said Barry Cottle, executive vice president of EA Interactive. “Our goal right here is they keep doing what they do, that they do so extremely well, and there’s just some natural synergies we can bring to the table that we can expand and make these guys bigger and stronger and more powerful.”

PopCap was preparing for an initial public offering this fall, but employees and founders were wary of how that would change the company’s culture, said co-founder John Vechey, 33.

“The IPO was fraught with risk; it was scary; people were going to start thinking about the stock price all the time. Most employees were worried about that internally,” he said.

“Now, instead of getting a couple hundred million in the bank for us to spend, we get world-class publishing” on platforms including mobile devices and social networks, Vechey added.

“I think for us it accelerates what we were going to do by many years,” he said. “We’re going to be seven years faster to achieving world gameplay domination.”

He said the deal was “a highly competitive process” with multiple companies interested in PopCap.

Vechey started the company with Jason Kapalka and Brian Fiete in 2000. Vechey and Fiete met at Purdue University in Indiana, where they built a multiplayer combat strategy game called “ARC.” It caught the eye of Kapalka, then a producer at Pogo.com in the San Francisco area.

Vechey and Fiete moved to San Francisco to work with Pogo on the game, then relocated to Seattle to work at Sierra Online, one of the area’s early computer-game companies. Kapalka also moved to Seattle and the three reconnected and decided to start the company about a year later.

The success of “Bejeweled” and their business model became a cornerstone of the Seattle-centered industry producing downloadable “casual” games.

EA is paying $650 million in cash plus $100 million in common stock that’s going to the PopCap founders and its chief executive, Dave Roberts.

Additional payouts of up to $550 million will be made if PopCap achieves profit goals over the next two years, although the maximum payout would require the company to increase its profit by 10 times over the next two years.

PopCap sales passed $100 million last year and the company netted about $15 million. To start getting bonus payouts from EA, it needs to grow profit to at least $110 million. To get the full $550 million, it needs to increase earnings before taxes and interest to $343 million over the next two years.

EA expects the deal to add at least 10 cents a share to its fiscal 2013 results, boosting its overall earnings per share by more than 10 percent, according to Chief Financial Officer Eric Brown.

Last year, EA’s digital business had $833 million in sales, while PopCap did just more than $100 million, 80 percent of which was digital content.

“It adds 10 percent to our digital business right off the bat,” Brown said.

Digitally distributed games are the fastest segment of the industry, which research firm Gartner expects will grow to $112 billion by 2015, up from $74 billion this year.

EA investors apparently aren’t as optimistic. The stock fell about 3 percent to $23.38 in after-hours trading, after the deal was announced Tuesday.

Although the profit goals needed for the extra payout are lofty, PopCap has a large catalog of games that it’s been slowly trickling on to new platforms such as Facebook.

It could potentially surge ahead by speeding up new versions of its franchises and launching new titles, although Vechey joked in an interview that its next entirely new game is being developed “at the same glacial PopCap pace.”

That slow and deliberate approach is what distinguishes PopCap, according to Ed Fries, a former head of Microsoft’s game studios who now advises and invests in different game companies.

“The reason that PopCap’s respected is they’ve always focused on doing a small number of very high quality things,” he said.

It’s harder than it sounds, he said. “That’s really been the key for them — don’t do a million different things; don’t get distracted by dates or other outside influences.”

Fries gave PopCap an early boost.

By chance, he and Vechey sat next to each other on a flight to Seattle about a dozen years ago, returning from a game-developer conference. That led to Microsoft signing the first license to distribute a PopCap game.

“We chatted the whole flight back, and he was just a great kid and I wished him luck,” Fries said. “It’s been amazing to see them grow and be successful and now to have this great outcome, it’s fantastic — it’s a Seattle success story.”